BBC memo denounces 'desperately out of touch' James Murdoch

The following correction was printed in the Guardian's Corrections and clarifications column, Friday 11 September 2009

Editing of the piece below touching on impending changes at the BBC meant that a comment by one executive – "We don't yet know what those changes will be" – was merged with and attributed to another by the director general, Mark Thompson.

The war between the BBC and Rupert Murdoch's News Corporation escalated tonight when the BBC director general accused Murdoch's son James of being "desperately out of touch" for lambasting the corporation in a speech last month.

Mark Thompson's decision to name Murdoch, who runs News Corporation's operations in Europe and Asia, in an email to employees heralds the start of a BBC fight-back following allegations that it is too powerful, according to senior sources at the corporation.

The chairman of the BBC Trust, Sir Michael Lyons, launched a separate public defence of the BBC, in an atmosphere coloured by Murdoch's combative speech at the MediaGuardian Edinburgh International Television Festival. Murdoch warned that the scale of the BBC's ambitions was "chilling" and called for it to be radically reduced in size.

In an unprecedented open letter to licence-fee payers, Lyons acknowledged that the BBC may have to "become smaller" in the current political and economic climate.

Thompson told BBC staff: "We've seen a pretty relentless onslaught from the press over the summer, culminating in James Murdoch's MacTaggart lecture," he wrote. "The most important thing to say about that lecture and about many of the recent attacks on the BBC is that they are desperately out of touch with what the audience themselves are telling us."

According to the poll, four out of five people said the UK should be proud of the BBC – which, Thompson noted, was "a much higher figure than when ICM asked the same question five years ago". The poll also found that 63% of licence-fee payers thought the BBC was good value for money.

However, Thompson's comments came as BBC insiders learned that the corporation may have to undergo radical changes to safeguard its future.

In a meeting this morning, Thompson told managers there was a limit to how much could be saved through "endless efficiency drives" and that "we have to make difficult choices". A BBC executive said: "We are not sure what they will be."

Lyons's open letter to licence-fee payers outlining the need for changes acknowledged that it "may mean the BBC becoming smaller". Sources emphasised that a review had been ordered in June and should not be seen as a response to Murdoch's attack.

Although Murdoch's speech was dismissed in some quarters as a self-interested swipe at one of News Corp's biggest rivals, many commercial competitors sympathised with some of his arguments.

The BBC has expanded dramatically in recent years, buying up Lonely Planet, the travel guide, and launching iPlayer, the hugely popular TV catch-up service.

In his email, Thompson acknowledged that market conditions have changed and that the implications for the BBC could be far reaching. "The old balance between the BBC and the rest of media has been upset as commercial business models are under severe pressure," he wrote. At the same time, the BBC signalled its intention to step up the fight against government plans to hand part of the £3.7bn a year licence fee to commercial rivals.

Lyons cited a separate Ipsos Mori poll, commissioned by the BBC, which found that audiences did not want the corporation's funds to be earmarked for other purposes. "Around half of those asked would prefer the licence fee to be lowered by £5.50, compared to just 6% who wanted additional money to be spent on regional news on other channels," said the BBC Trust chairman.

The government's Digital Britain report, published this summer, raises the prospect of using licence fee money, set aside to meet the cost of digital switchover, to pay for regional news services and, possibly, children's TV shows.

In his letter, Lyons said the BBC "cannot be allowed to use its strength and public funding to compete unfairly or to squeeze out new or weakened competitors".

The trust had already "acted to curb BBC activities which impact on the wider industry, including signalling our intention to narrow the remit of its trading arm BBC Worldwide and pushing the BBC to curb pay to top talent".

"The BBC is not frightened of change," Lyons added. But he warned that any changes "must be driven by what the public wants and not by commercial or political pressures".